In this week’s episode of China Insider, Miles Yu discusses the Xi Jinping’s recent trip to Shanghai as China seeks to solidify its role in the Global South and promote domestic artificial intelligence innovation and development. Next, we revisit trade tensions between the United States and China and assess the potential for bilateral trade negotiations to resolve the ongoing trade war. Lastly, we examine China’s current trade policy and economic growth in the face of continued US tariffs, and the consequences of a sustained economic conflict for China.
China Insider is a weekly podcast project from Hudson Institute’s China Center, hosted by China Center Director and Senior Fellow, Dr. Miles Yu, who provides weekly news that mainstream American outlets often miss, as well as in-depth commentary and analysis on the China challenge and the free world’s future.
Episode Transcript
This transcription is automatically generated and edited lightly for accuracy. Please excuse any errors.
Miles Yu:
Welcome to China Insider, a podcast from the Hudson Institute's China Center. I am Miles Yu, Senior Fellow and Director of the China Center. Join me each week for our analysis of the major events concerning China, China threat and their implications to the US and beyond.
Colin Tessier-Kay:
It’s Wednesday, May 7th, and we have three topics this week. First, we discussed Xi Jinping's visit to Shanghai last week as China seeks to affirm its role in the Global South. Second, we revisit the ongoing tariff war between the US and China and the consequences of a sustained economic conflict for China. Lastly, we take a deeper look into China's trade policy and economic growth in the face of these continued US tariffs and whether current strategies have yielded any results. Miles, great to be with you again this week.
Miles Yu:
Nice to be with you again, Colin.
Colin Tessier-Kay:
So we start things off with Xi Jinping's visit to Shanghai last week, his first since November of 2023, in a reported show of strength in the face of US tariffs. Xi visited several facilities including the new development bank, which serves as the multilateral financial hub for BRICS member nations, and spoke about efforts to accelerate AI development and innovation at Shanghai based incubation labs for AI startups. So Miles, what are the reasons behind Xi's trip to Shanghai this time and why now?
Miles Yu:
Well, there is a political reason. There is a specific economical reason, but mostly it is a gesture. I mean, you mentioned about Global South. Yes, this is the 10th anniversary of the bank. It's called New Development Bank, NDB, which is basically created by China and with the participation of the BRICS country in 2015. This one is based in Shanghai. And so the member nations initial five, Brazil, Russia, India, China, and South Africa. Now they added several of them, Bangladesh and all the other countries of less significance. However, the whole purpose of having this bank under China's control in Shanghai is to create a major narrative. That is, the existing global financial and economic system under the Bretton-Woods framework is fundamentally unfair. It's fundamentally anti-developing countries. This is China's major narrative. Therefore, China wants to create an alternative to the existing international financial institutions symbolized by the World Bank and International Monetary Fund. And this meeting is particularly important, 10th anniversary meeting in Shanghai, because this was the indirect response to the just concluded IMF and the World Bank annual meeting in Washington DC. So China fancies this NDB as a counterweight to the West. It's a major tool of China's way to basically to create global dominance. So this is the major reason Xi Jinping went to Shanghai.
I mean this NDB is, in reality, is not really that powerful because it is pretty much like try to create a market under Chinese control. It has a $100 billion objective, so sort of authorized capital. But in reality, China has not foot the bill as promised. And also China say the World Bank and IMF is not fair because the voting power is determined by how much each country contributed. China say, okay, in this new system, this NDB and we're going to have equal power. In other words, every member would have essentially a veto power. That really create a problem. China, even though say this is based upon the principal of equality, but countries like India will never let China dominate institutions like this. So that's one reasons why in reality this is not really that effective. But most importantly, China wants to use this BRICS bank based in Shanghai as a conduit to internationalize its inconvertible currency, the renminbi, the yuan. And that basic effort has not really worked out well at all because even though this is bank under Chinese control, but the major settlement currency under this bank is predominantly still US dollars because you cannot deny reality.
So for many reasons, I mean this is not a really good institution effort despite Xi Jinping's constant encouragement and attempt to boost the efficacy of this bank. So I think this is one of the most important reasons he went to Shanghai. Of course there is a particular timing that is also worth noting. This is a time when China's economy is under serious distress, if not a crisis, in the current tariff war between China and the United States.
Colin Tessier-Kay:
And while - it seems like you could wrap this whole trip up into the umbrella topic of show of strength, and Xi’s remarks also seem to focus on international development and FDI goals via NDB like you mentioned. But I also noted that in his other speeches [Xi] promoted domestic AI innovation and artificial intelligence development, but didn't exactly pose any tangible strategies or policy initiatives to do so outside of general promotion, especially within the Shanghai network of hubs. So Miles, what exactly were the key messages Xi wanted to convey on this trip and how did they come across from the perspective of Chinese citizens?
Miles Yu:
Well, he wanted to deliver a message of resiliency, confidence, and the effect is almost minimum. Even it is negative because this huge hoopla about his visit to Shanghai is supposed to boost the market, and the market barely reacted either way at all. So there's basically fell flat. And during his visit, China is still instilled in nationwide closing down of the shops, factories. And there is an increasing amount of protest of workers unemployed and demanding their employers to pay off the IOU. So you got this major problem.
So one of the major issues that Xi Jinping could not really have control is the mounting unemployment numbers. Goldman Sachs estimate in the current tariff war, China might lose somewhere between 15 million to 16 million jobs. And this is amazingly devastating because most of the jobs will be focused, will be on the export oriented major coastal areas in China. And right now you have basically the wave of factory closings and the customer confidence continues to drop. Now, the PMI, the Purchasing Manager's Index has really dropped down under 50, which is an indication of Chinese economic vitality is gone. So you have that situation. And also because of this, capital flight increased dramatically a lot of money in China to get the hell out of the country.
So it is in this background that Xi Jinping went to Shanghai and make a lot of really high profile shows and performances. And as I said, all these efforts really didn't amount too much and the government has not really responded very decisively and drastically to the crisis caused by the tariff war because anything that Chinese government is doing in that direction will be construed by Washington DC as retaliation. And that's why if retaliation continues, China is in no position to counter.
Colin Tessier-Kay:
So just to summarize everything that was mentioned here - Xi focused principally on strengthening cooperation with the New Development Bank across member countries in the Global South, as actually he [said], “an important force in safeguarding world peace,” and coupled this with domestic calls for expansion in AI innovation and development, particularly in Shanghai with national level policies that would support the diffusion of this technology across various economic and social sectors. But with all of this, you know, all well and good, but let me ask you Miles, do you believe this messaging will work in achieving any of these outcomes desired? And will it at least be successful in mitigating any losses due to the ongoing trade war?
Miles Yu:
I doubt it. I think the government might achieve some kind of an immediate goal by fusing some capitals into the market. But in the long run, what really ails China is not temporary stimulus prime, it is really institutional, structural. I mean, your currency is not convertible and you pretty much is still the command economy. All the major economic, financial and currency decisions are not made in response to markets, but by the politburo for political purposes. I mean, that's why I think consumer confidence and investments are all done. So I think you have to really cure China's economic problem from the root, not from just the surface.
Colin Tessier-Kay:
Yeah, and that's going to be an important development to track as we see what happens over the next couple of weeks in regard to the ongoing tariffs. But kind of transitioning into our next topic for today, and building off of something that you brought up, last week, treasury Secretary Scott Bessent delivered remarks as the US-China trade war intensified and noted that China stands to lose 10 million jobs if the current tariff levels were to continue. Some additional experts have said this could actually be as high as 16 million jobs depending on how things unfold. But even with potential lower tariffs on the horizon, Secretary Bessent mentioned China would still stand to lose at least 5 million jobs as a result. While unconfirmed, prior rumors about secret talks between the US and China hinted at potential trade deals being discussed. So Miles, what should we make of this analysis from the Secretary of the Treasury? And could China really lose up to 10 to 15 million jobs here if things continue as they are?
Miles Yu:
I think China's unemployment rate has been going on for a long, long time, even before the tariff war. I mean, look at this. The Chinese government, their official number two years ago for youth unemployment, that is people from age 16 to 24, somewhere in that range was close to 20%, is 19.5%. I believe that's the number, and that's official number. That's really, really high. Now, the real number, many economists estimate much higher than that. Sometimes people say it is as high as 45%. So the unemployment was structural. It was actually not necessarily the result of tariff war. So this tariff war aggravated that situation. So I think China's problem is really structural. It has something to do with the fact that Chinese economy is fundamentally, number one non-market, number two anti-market. The economic miracle we have been witnessing for the last 20 some years is not because of the Chinese Communist Party. It's in spite of that. That is the non-state sector that was heavily involved with international free trade system. Those were the sectors that could produce almost the entire growth of economic development in the last 20, 30 years. So the state-owned enterprises barely make any difference, any growth contribution at all. So that's one of the reasons why you see the unemployment number 10 million, 15 million, 16 million should not be surprising at all to a lot of people.
Colin Tessier-Kay:
Yeah, and as far as we're aware, no formal discussions for bilateral trade agreements have been announced or made public yet. But since Secretary Bessent announced that the US was close to deals with both India and South Korea, China said it's evaluating US requests to initiate trade negotiations. And at the very least, any such talks could lead to a potential resolution of this trade war. But Miles, let me ask you, what exactly is the current dialogue between the US and China regarding the trade war and have there actually been further secret talks?
Miles Yu:
Well, China says it's going to fight to the end with Donald Trump. I mean with what? China is a surplus country in terms of trade. China's trade globally is huge. Over a trillion dollars, close to 40% of the entire China's international trade is with the United States. That's the leverage US has. So China is the only country that retaliated against Donald Trump's reciprocal global tariffs. And when United States is negotiated with, probably, every country that has trade relations with the United States, China said, we're not going to negotiate at all unless the United States get rid of all tariffs. That's the Chinese demand. You read this on a daily basis from China's official media. And so China basically tried to project the image of acting tough, but in reality, they have been doing something they know they cannot win, which is sort of something sub-rosa, without the open announcement. But they don't want Chinese people know, the government really is dependent on the US market.
So for example, there are high officials that have been negotiating with Secretary Bessent and his people in the US Treasury about two weeks ago. This is on occasion of Chinese finance minister attending the IMF and the World Bank annual meeting. So their move around had been documented by journalists, but they don't want people to know in public. On the other hand, China also makes some unannounced adjustment about tariffs. They have reduced several key items of US export to China to zero tariff. That these items that China is heavily dependent on, including semiconductor components, medical equipment with high precision nature, and most importantly certain part of agriculture and energy products. These were big. China use agriculture and energy as a major weapon against the United States, but now they have a yielded, this is a major concession. So I think, in other words, as I said before, as much as US depends on the Chinese market, China is much more dependent on US market. And in other words, China needs us much more than the other way around. So I think this is basically, it's almost suicidal for China to continue on without engaging with the United States in a very constructive manner.
Colin Tessier-Kay:
Yeah, it seems like if China's facing structural issues in addition to external pressures from ongoing trade tensions, it seems like they're almost purposefully fighting a war on two fronts of their own on an economic standing. And kind of piggybacking off what you just said there, I'd like to continue on this economic thread in the ongoing trade war with, as we shift to our final topic for today to discuss more or less the greater impact the trade war has had on the Chinese economy to date. The reciprocal tariffs levels have remained at an effective 125% for both sides for several weeks now. And despite various exemptions and potential talks of rolling back current tariff levels from both sides, this has resulted in significant economic impacts for both the US and China. And like you mentioned last week, China quietly announced exemptions and zero tariffs on select US imports where China has really struggled to procure alternative sources for those goods. Like you mentioned US made semiconductor chips, medical supplies, energy and agriculture, even aircraft components from Boeing while they look to source elsewhere. But Miles, what really is the impact that the trade war has had on the Chinese economy overall to date? And do you believe they will roll back any exemptions if they are able to procure alternative sources for essential goods?
Miles Yu:
I mean, I don't think that they can really procure a lot of alternative imports from the United States. US has some unique products China heavily depends on. You mentioned about China, the aircraft products. China order the suspension or accepting deliveries of Boeing aircraft service and parts. I mean, that's basically, again, it is not really good, it is suicidal, because China already has a lot of Boeing aircraft. If Boeing stopped delivering parts and services many of the Chinese aircraft would be grounded, I mean including Xi Jinping's own presidential aircraft, their Chinese version of Air Force One, which is a gigantic Boeing 747-8. So that basically is a reality.
On the other hand, most of the Chinese imports to the United States, Americans, yes, there are cheaper because China does have the labor cost advantage, but most of the items for average Americans are discretionary. You don't buy 30 cheap bikes made in China. You don't buy a hundred shirts cheaper than most of the products made from other countries, from Walmart or from Costco. So what I'm saying is you do have these different kind of products that both countries need, and they have different kind of demands. China imports a lot of American products that really is crucial for Chinese economy and they must have, while most of the Chinese products in the United States are not necessarily everybody must have, they are discretionary. On the other hand, China does have the one advantage, that is, many of the American big corporations have transfer big portion of their manufacturing capability to China like Apple, like Tesla. However, as the tariff war continues, virtually all those companies are considering getting out of China, at least a portion partially. Apple, for example, has already announced they going to move a significant portion of its iPhone manufacturing capability equipment away from China to India. And I think Tesla is doing pretty much in a similar way.
So what I'm saying is, tariff war is bad for China, and China has to accept the fundamental premises of the Trump administration's argument that, more or less, America’s trade relationship with the majority countries in the world, particularly China has been unfair, has not been reciprocal, because China has been imposing much higher tariffs on the United States as well as so does the EU. So that's why tariff rate is less relevant here than the major argument by the Trump administration. That's why the rate sometimes can be scarily high, but that's not the purpose itself. The purpose is to use this high tariff rate to force other countries with unfair trading relations with the United States to negotiate, to make compromise, and that's the way the US government has been doing. I think China has to be reciprocal and at least they should be more acceptable to that kind of entreating.
Colin Tessier-Kay:
Yeah and then I guess to kind of close out this week with one final question, I want to flip the script a little bit and kind of approach this from the US perspective. At least to date, the Trump administration in various capacities has at least indicated it would like to achieve a trade deal, perhaps bilateral trade deal with China, and at least reduce current tariff levels back down to prior levels if possible and potentially even further. But thinking strategically, and I guess in the context of the US-China strategic competition umbrella, given that China seems to have much more going on here, it seems like the US has a little bit of a strategic advantage, at least in the economic context. Would there be a continued strategic advantage, let me ask then, for the US to continue with these tariffs, if China stands to lose that much more?
Miles Yu:
For the US yes obviously, but I think China will lose more. Secretary Scott Bessent made a very interesting point when he was talking to the World Bank people a couple of weeks ago. He said, the issue with China is not just about those cheap labor, intellectual property theft, those are all true. The fundamental issue is that China has over capacity of production. That's because China's economy is heavily, heavily toward export orientation. And so the only way to solve that problem is to make a Chinese economy with a focus on domestic consumption. In other words, you can make stuff, but then you can make Chinese people buy. Well, that actually is not a bad prescription of the problem with China. I think it is more political than financial and economically in my view, because the Chinese government has been enriched by international trade, but not every Chinese person enjoy this kind of benefit of economic growth.
Don't forget, the Chinese people, many of them are very poor. Over 40% of Chinese population makes less than $5 a day. That's according to Chinese state statistics. Now, also, according to the Chinese statistics, about 92 to 93% of the Chinese population, more than 1.3 billion people are making 5,000 yuan a month. That translate to about $25 to $27 a day. Now, that's not a really big consumer purchasing power. So in order to make this Chinese over capacity go away, you must develop a very big and strong consumer market within China. That's a very, very big, big historical shift. United States developed its consumer market, which is the largest in human history, hundreds of years ago since, you might say, since the administration of Thomas Jefferson. President Jefferson had this similarly disastrous policy of embargo in 1807, but it did achieve a very unintended consequence. That is, that Jefferson embargo forced America’s commercial capital to become industrial capital to make manufactured goods inside the United States for domestic consumption. And so this is the economic history 101. But I think China does not have that. Chinese government wants to make money from international economic system and to enrich itself to, basically, to build up this military, to build up this repressive police state. They all have done that, but the people of China, the people who created this wealth actually are not the beneficiary of the economic miracle. That's what the Secretary Bessent is trying to say. But I don't think that really is purely an economical problem. It's purely a political and ideological institutional problem.
Colin Tessier-Kay:
So we'll see what happens over the next couple of weeks as the trade war continues, and then the tariff levels are continue to unfold. But we've unfortunately reached our time for today. Miles, as always, thank you for this week's conversation and lending us your perspective on these critical issues. And we'll check back with you again next week.
Miles Yu:
Alright, see you next week.